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Fixing the financial system?Views: 371
Apr 06, 2010 11:43 pmFixing the financial system?#

Ken Hilving
Boston University economist Laurence J. Kotlikoff wants to take all the risk out of banking, hedge funds and insurance companies. He insists that all the Obama Administration is doing is "putting a band-aid on cancer." And some people are listening, says BusinessWeek.

Here's how the Boston University economist would reorder the financial system:

Bank Deposits

- Banks couldn't lose depositors' money.
- Deposits would be safeguarded in a mutual fund that holds nothing but cash.
- Withdrawals would be via check or ATM, as now.


- Banks wouldn't be exposed to loan losses.
- All loans would be made by mutual funds using money raised from investors.
- Those investors would swallow any losses from defaults.


- Insurers couldn't be ruined by big claims.
- Policies would be issued by a mutual fund that collects insurance premiums.
- Payments would be limited to whatever is in the fund.

Investment Banks

- These would become pure advisors.
- They would be banned from holding assets or borrowing to buy them, so they would not be exposed to market losses.

Source: Peter Coy, "The Man With the Meanest Bank Shot," BusinessWeek, February 15, 2010.


Private Reply to Ken Hilving

Apr 07, 2010 3:27 amre: Fixing the financial system?#

Thomas Holford
The guy seems to like mutual funds.

I don't know if this is a good idea or a bad idea. It's just too much "inside baseball" for me to relate to.

I suppose I will have to read the article.

T. Holford

Private Reply to Thomas Holford

Apr 07, 2010 1:22 pmre: Fixing the financial system?#

Ken Hilving
Seems to me that any of this could be implemented without any new regulatory effort, and offered to the general public using "transparency" as the key marketing focus.

Bank deposits, held in cash, would not gain interest and would have a service cost for the operation. Inflation would reduce the value. Yet the deposits would be more convenient to use (checks, ATM) and secure (bank vault versus mattress). As an alternative, the amount of deposits involved in loans or investments versus held in cash is something a bank could keep its depositors aware of.

The uninsured loan approach seems like an incentive for local banks to work with those they make loans in partnership. A defaulted loan becomes a real loss, and changing terms to reduce or prevent that loss becomes mutually beneficial.

Insurance should work that way, and like bank deposits any split between premium payments held in cash and cash invested is something the insured should know.

So, anyone know of any banking or insurance companies that do this today?

Private Reply to Ken Hilving

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